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RBC raises dividend, reports profits up but under pressure from interest rate margins

TORONTO — Royal Bank of Canada raised its dividend Wednesday as it reported a rise in fourth-quarter profits from last year, though it said earnings were hit by lower margins in part from low interest rates and heightened competition.

TORONTO — Royal Bank of Canada raised its dividend Wednesday as it reported a rise in fourth-quarter profits from last year, though it said earnings were hit by lower margins in part from low interest rates and heightened competition.

The bank said it will now pay a quarterly dividend of $1.20 per share, up 11 per cent from $1.08 per share, after the federal banking regulator lifted the restrictions it imposed on banks and insurers at the start of the pandemic on increasing payouts. RBC said it also plans to buy back up to 45 million shares, representing about three per cent of existing stock.

The quarter saw mortgage activity reach new heights, with RBC boosting its total residential mortgage loans to $330 billion in the quarter ending Oct. 31, up 2.5 per cent from the previous quarter, 12.5 per cent from a year earlier, and up 25 per cent from the last quarter of 2019.

Net interest margin, a measure of profitability, was down nine basis points from the previous quarter in Canadian banking because of several issues, including a lower spread on mortgage loans. 

"You saw the momentum in the quarter-over-quarter numbers, which positions us well," said David McKay, chief executive of RBC on an analyst call Wednesday. "Our disappointment also was that we didn't drive as much to the bottom line as we would normally with that type of volume." 

Neil McLaughlin, group head of personal and commercial banking at RBC, said there was exceptionally strong mortgage volume across the industry for a record amount of originations, which has created price pressure in the mortgage business.

"With that really strong market and all that demand, you know, increased price pressure from competition. So it's been a very tight market."

The bank's earnings were also hit by a narrower interest margin in its U.S. business, with a 20-basis-pointdrop at its City National Bank in part because of fees related to the federal Paycheck Protection Program, as well as from the overall asset mix.

Going forward, the bank expects to benefit from higher interest rates as central banks respond to inflationary pressures.

McKay noted that lower interest rates have reduced the bank's revenue by about $1 billion a year for the past two years, mostly in Canadian banking and U.S. wealth management, while Nadine Ahn, chief financial officer at the bank, said that a 25 basis point increase in interest rates could boost revenue by $250 million over 12 months across those two divisions. 

The low rate environment has helped the credit picture of the bank's lending portfolio, allowing the bank to decrease provisions for credit losses on loans by $616 million from a year ago.

That helped boost earnings to $3.9 billion for the quarter, up from $3.2 billion in the same quarter last year.

RBC says its profit amounted to $2.68 per diluted share for the quarter ended Oct. 31, up from $2.23 per diluted share a year ago. Revenue totalled $12.4 billion, up from $11.1 billion in the same quarter last year.

Adjusted profit amounted to $2.71 per diluted share, up from $2.27 per diluted share in the same quarter a year earlier.

Analysts on average had expected an adjusted profit of $2.81 per share, according to estimates compiled by financial markets data firm Refinitiv.

"[RBC] incurred margin compression on both sides of the border, with strong loan growth unable to offset the pressure on revenues," noted Barclays analyst John Aiken. 

He said that bank lending outside of mortgages, such as credit cards, could help boost interest margins, while growth in areas less dependent on interest rate margins such as capital markets and traditional wealth management could also boost earnings. 

Aiken also noted that the challenges RBC faces are industry-wide.

"The quarter was not as robust as we would have liked but this appears to be a sector-wide, rather than stock-specific, phenomenon this quarter."

Another sector-wide challenge lurking ahead is a proposed three percentage point corporate income surtax on large banks and insurers that the Liberal party promised in its election campaign.

McKay said on the call that it was not the time for such measures, and that singling out certain industries was not helpful in attracting capital. 

"We're going through an enormous transition of our economy, supply chain transition, climate transition journey where we're going to need up to $2 trillion and therefore, creating an environment that attracts capital and where the rules around the economics are certain for a longer period of time is really important," he said. 

"When you start proposing taxes right now, in this narrow way, can have a real detriment to the overall investment thesis for Canada."

RBC declined to estimate the impacts of the tax as the details of the proposal have yet to be released. 

This report by The Canadian Press was first published Dec.1, 2021.

Companies in this story: (TSX:RY)

Ian Bickis, The Canadian Press